Bear of the Day: Agnico-Eagle Mines (AEM)

As long as the price of gold continues to drift lower, it seems earnings expectations for miners of the yellow metal are following its decline. And in the high-risk metal mining industry, costs can quickly escalate too.

This week, Agnico-Eagle Mines (AEM - Free Report) dropped to a Zacks #5 Rank as analyst 2013 EPS estimates have fallen from $2.44 to $2.04 in the past 60 days. And downward revisions have taken the full-year 2014 down to $2.36 from $2.80.

Agnico-Eagle Mines Limited is a Toronto-based gold producer with operations in Canada, Finland and Mexico. The company's LaRonde mine in Quebec is one of Canada s largest operating gold mines by gold reserves and has provided the company s foundation for domestic and international expansion.

Profits Again, But Rising Costs

The company missed expectations in fourth-quarter 2012 with both revenues and adjusted earnings falling short of the Zacks Consensus Estimate. But this was a welcome return to profitability from a year ago.

On a reported basis, the company turned to a profit of $82.8 million or $0.48 per share in the quarter compared with a loss of $601.4 million or $3.53 per share a year ago. The bottom line in the year-ago quarter was hit by $907.7 million of impairment charge at their Meadowbank mine in northern Canada.

For full-year 2012, the company posted a profit of $310.9 million $1.81 per share versus a loss of $568.9 million or $3.36 per share in 2011. The hefty impairment loss coupled with production suspension at the Goldex mine crimped the bottom line in 2011. Adjusted earnings of $1.87 per share fell behind the Zacks Consensus Estimate of $2.12.

While Agnico-Eagle maintains a solid exploration budget and is reinvesting in its assets to expand output, any potential delay associated with the development projects may jeopardize its future production.

And here's the view of future profits according to the analysts...

One of Agnico-Eagle's main issues has been the persistently high operating costs at its Meadowbank mine in the Canadian Arctic. Ore dilution resulted in lower than expected grades to the mill, and the cost of transportation, logistics, labor and maintenance continued to be much higher than expected.

According to the company, Meadowbank previously had a property, plant and mine development book value of about $1.7 billion. Owing to persistently high operating costs, the latest optimized mine plan for Meadowbank resulted in shorter mine life and the company had to reduce the carrying value of the operation. The company expects cash costs to increase across a number of mines in 2013.

Shut-Down = Write-Down

Agnico-Eagle suspended operations at the Goldex mine in October 2011 due to suspected rock subsidence in the hanging wall above the GEZ orebody. Considering the safety of its employees, and the integrity of surface infrastructure, the company decided to stop production at the mine.

Due to the uncertainty regarding any future production at Goldex, a $161 million after-tax write down was incurred. In addition, all proven and probable reserves at Goldex were transferred into mineral resources.

All About the Glitter

AEM's fortune's are closely tied to the barbarous relic, as are those of most miners. One business practice that could be a double-edge sword is the fact that the company is that they don't hedge.

Throughout its 40-year history, Agnico-Eagle's policy has been not to sell forward its future gold production. In 2012, Agnico- Eagle produced 1,043,811 ounces of gold at total cash costs of $640 per ounce.

The advantages to hedging might become apparent if gold enters an extended decline. Many miners will wish they would have sold gold forward contracts above $1600 should the price drop persist.

For further perspective, the gold miners are currently ranked in the bottom 10% of Zacks Industry groups. Until the outlook for the miners and the metal changes, it's probably best to stay away.